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Wednesday, June 8, 2011

Cyber privateer pro forma financials

I received a comment on yesterday's post on "attribution" from Matt (which I posted and answered but which got me thinking). Here's Matt's question:

Hey Rick, I was just curious if you have ever come across any economic theories that support the concept of privateering? Something that provides a calculation as to how fast it would expand, or how much money would be required to provide adequate incentive. That type of thing? Or is their similar industries that have the same dynamics of your vision of cyber privateering? Thanks.

My answer (typed from bed late at night on my iPad):

The numbers I've run are a reverse hockey stick, meaning that in my most likely scenario, the first hit would be a Godfather-like "This is the day we take care of all Family business." Paccino statement. After a well publicized parley dialogue, most of the cyber thieves will roll up their operations and run for cover. Deterrence is key. And it will take government-scale resources to do it right.

Matt deserves a little more thoughtful answer. I love playing with pro forma financial statements, especially since I specialize in helping start-up tech companies and want to help them be realistic yet optimistic. So let me thoughtfully take down Matt's multiple questions in order:

Economic theories that support the concept of privateering: The closest I've come is to look at actual privateering analytics from the Revolutionary War (see my post on the subject). My net-net on the high-risk/high-reward business model showed VERY high rewards with a 78% kill-or-capture rate on their efforts.

How fast will it expand? There are multiple dependencies here, which I'll address below. It appears that the Revolutionary War incentives to enter privateering were so substantial as to cause an explosion in interest that dwarfed the ability of the Constitutional Congress to raise men, ships and arms.

How much money would be required to provide adequate incentive? I have proposed a 50/50 split between the privateer and the government issuing the Letter of Marque and Reprisal. Assuming that the bonding authority would demand 10% of the total take to buy the bond (yes, I pulled this out of the air using the current bail bond amount demanded by those guys with offices near pawn shops, bars and jails), the cyber privateering organization would end up with 40% of the take. How they incentivize their privateers would probably follow Silicon Valley equity formulae for compensation. Which brings us to the final question posed by Matt…

Are there similar industries that have the same dynamics? Yep. In the 1970s it was the mini computer explosion. In the 1980s it was PC explosion. In the 1990s it was…yep, you guessed it…the IPO bubble. In this century, it's the Internet explosion. All are technology plays, and all attract the very best and brightest people.

My point #4 above almost answers Matt's question #2: "How fast will it expand?" Here is where the dependencies come into play.

First, which government will get the first-mover advantage. Australia? Switzerland? The USA? Each case offers vastly different dynamics. The USA is my preference and probably offers the fastest path to fame and fortune for first-mover cyber privateers.

Secondly, how many Letters of Marque and Reprisal will be issued in the first round? Let us assume the USA bites the bullet and proceeds. If they proceed cautiously and grant just one LoMaR (hey, a new acronym), it will probably be to Very Big Organization, possibly even another government (like Israel's Mossad). That being the case, the initial raid would be truly gigantic and cause such a worldwide reaction as to stop cyber crime cold. Hence the hockey stick analogy in my original answer to Matt's post.

A more likely but (in my mind) far less desirable USA implementation would be to award half-a-dozen "Beltway Bandits" LoMaRs. Assuming they could find a bonding authority that would indemnify them, they'd probably screw it up anyway.

A more desirable approach would have LoMaRs issued to guys like Oracle's Larry Ellison or Salesforce.com's Marc Benioff (two of my Cyber Privateer Fantasy League nominees), among others. This would stand the highest chance of success.

Finally, in my fantasy world (after all, I am doing this as research for several in-progress novels), the Senate Select Committee on Intelligence would grant me a top-secret LoMaR and simply publicize the fact that "one had been issued to an unnamed entity." Just the existence of such a vehicle would cause come cyber criminal and rogue government consternation. I would, of course, use some resources available to me to open up a giant can of whup-ass. I'd probably screw it up, but it surely would be fun until somebody grabbed me and started pulling out fingernails.

1 comment:

Very interesting. It is my view that cyber war will have to have a physical component to protect the hacker(s), or to attack and torture/interrogate other hackers. These folks would have the keys to the kingdom, or access to all types of weaknesses in government and business. So the likely evolution of this kind warfare is to couple the concept into kind of a combined arms deal. A cyber lance is the term I coined for the concept on my blog called Feral Jundi.

I too am very interested in the economics, effectiveness and lethality of privateering in all of it's forms. It deserves far more study than what it is given.

To back up the concept with actual theories, or to draw upon the case studies of early privateering or modern day offense industries would be helpful. Examples would be the Sicarios that the cartels use, the privateers of the Revolutionary War and War of 1812, today's modern Somali piracy scourge, China's use of freelance hackers, buffalo commercial hunting in the old west, or even today's commercial fishing or hunting licensing schemes of the states. I also think the study of bounty hunting would help develop theories on the economics of privateering.

This would be a great RAND project. lol Until then, they are just ideas floating around that have yet to be assembled and presented in a viable theory.

Implementation suggestions for THE MORGAN DOCTRINE are most welcome. What are the "Got'chas!"? What questions would some future Cyber Privateering Czar have to answer about this in a Senate confirmation hearing?

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Background: Welcome black hats, white hats and cyber swashbucklers

The Revolutionary War was fought, financed, and pretty well WON by bonded privateers, legalized pirates who were given Letters of Marque and Reprisal by the Continental Congress and authorized to attack, capture and monetize British ships. The purpose of this site is to explore the possibility of a modern-day doctrine much like the Monroe Doctrine, by means of which the U.S. government could legally and, more importantly, effectively stop international hackers. Current cybercrime law is not only ineffective, but downright stupid. My Linux servers are attacked hundreds of times a day (mostly from China and former USSR domains), yet if I retaliate against those servers with some creative technology at my disposal (I know some VERY smart guys), then I am in violation of federal law and subject to some onerous penalties. We need more than a new law. We need a new international doctrine. I call it The Morgan Doctrine, named after Morgan Rapier, a fictional character I've created (hey, this is my way of establishing ownership of the concept, should it ever see the light of day).

Why a new international doctrine? Simply, nothing else will work. Introduced on December 2, 1823, the Monroe Doctrine told the world to keep their hands off the Americas. Combine this with current legal thinking on "hot pursuit" of fugitives. In 1917 the US Army went into Mexico after Pancho Villa. More recently, in 1960 Israeli Mossad agents abducted Adolf Eichmann from Argentina. Granted, much of the world regards the Eichmann adventure as a violation of international law. I don't share that opinion and therefore use it as the third leg of my Monroe-Pancho-Aldof platform for The Morgan Doctrine.

If someone comes into your home and attacks or attempts to rob you, you may shoot them dead. You may do so as long as they expire on your property. But what about cyber criminals? They attack you in your home from their homes. Retaliate in kind, and you go to jail. The Morgan Doctrine states simply that if you attack my computers (or my banking assets held in US-based computers), then under a certain set of well-defined conditions, a licensed and bonded "cyber privateer" may attack you in your home country and split the proceeds with the U.S. government. For the sake of argument, let's call it a 50-50 split (heh heh).

Right now, American law enforcement is completely unequipped to deal with the sheer number international cyber hackers. Sure, I could report each of the thousand daily attacks to the FBI, as could the millions of other attackees in the USA. But the volume of such reports would make any meaningful resolution laughable. Not to mention that the FBI has no jurisdiction outside the USA. Yet to make such "enforcement" profitable to recognized (ie, "bonded" "deputized") privateers, as Heath Ledger's Joker said in his last role, "Now you're talking!" You raid our bank accounts, we raid yours. You make money from off-shore child pornography, we're going to loot your bank accounts and, with some REALLY creative black hat operations, you will be taken off the grid worldwide to the extent that you'll not even complete a cell phone conversation for the remainder of your miserable depraved life. Okay, that last part probably won't fly, but you get my drift.

The purpose of this site is to explore the mechanics, legalities and practicality of The Morgan Doctrine.

And I will be the sole arbiter of whether or not your comments get posted. As Mel Brooks wrote, "It's good to be king."